The Bank of Mum and Dad is always opening new branches but beware of the tax and other implications

The financial services company Legal & General every year tracks the financial support parents give to their children. In 2023, the Bank of Mum and Dad, or perhaps now the ‘Family Bank’ as the wider family become increasingly involved, helped fund over 318,000 new home purchases, with gifts and lending reaching £8.1 billion. It is effectively the country’s ninth largest lender, opening a new branch daily.

The Family Bank is often the first place children turn when faced with big ticket expenditure – a wedding, paying down student debt and, increasingly, help with buying a home.

The Legal & General research found that 186,700 homes have or will be bought with help from mum and dad, while 131,700 will be bought with help from the wider family and friends.

On average, the Family Bank hands over £25,600 towards the purchase of a home, with most using it towards a deposit.

Given the frequency of family lending, a surprisingly small number of family lenders obtained financial advice and even fewer sought professional advice.

Gifts

For wealthy family members with money to spare, the simplest way to support their children is an outright gift. There is no limit on the value of those gifts, but if they are to be exempt from IHT the donor must live for seven years. Some might even be able to provide support by means of exempt gifts out of income which are immediately exempt so long as they are out of surplus net income.

Loans

Many may not be able to gift the full value of a property or deposit to their children, or may not want to, and so prefer to provide a loan. For example, they might want to have access to the funds for their own use in the future or wish to protect that value from a future settlement on divorce or other event. Whatever the reason the value of the debt remains in the lender’s IHT estate.

The loan can be waived later by means of a deed but this will only be treated as an IHT gift at that point with the need to survive seven years for full IHT exemption.

It is recommended that the repayment terms of the loan are clearly set out and understood by both the lender and the child so that it can be evidenced if required, say in the event of a divorce is important.

Shared ownership and equity

A common option is for parents to purchase jointly a property with a child. Whilst it may be for the sole use of that child, HMRC is likely to consider it a second home, so that the purchase attracts higher rates of stamp duty land tax. This approach is also likely to have capital gains tax implications should the property be sold for a profit.

Others will wish to protect value by retaining a share of the proceeds or restricting a future sale.  Whatever approach is adopted, lenders might find that value remains in their estate with significant IHT implications.

Other matters to consider

Depending upon the situation a pre-nup agreement might be appropriate to protect family wealth.

The approach might also need to take account of the requirements of a commercial lender, for instance regarding its own legal charge.  This might require any family funding to be by way of a gift to simplify things which might conflict with what the family is seeking to achieve.

Further protection measures might also be advisable where property is purchased with a partner or friends to ensure clarity and security in the future.

Another key consideration is the possible tax and other consequences of sourcing the funds at the outset.

It is only natural for family members to want to help each other and in essence it seems straightforward but as with any significant financial arrangement there are many issues to consider if the funding is to be provided in the most appropriate way.

This piece inevitably only touches on some of the main issues to be considered.  As detail varies between families and circumstances each situation must be considered on its own merits.

It certainly makes good financial sense to be aware of the implications before you open your own branch of the Family Bank.

For more information, please speak to one of our Private Client Services team.